by Brian Mahany
For those not in the mortgage industry, a “net branch” is a branch office of a mortgage company. The branch usually keeps all the income from loans originated within the branch, less the lender’s administrative or overhead fees. Many mortgage industry professionals like them because it allows folks to quickly open a branch office while relying on the lender’s licensing and name. HUD, on the other hand, believes that many net branches are an illegal method for independent brokers to originate FHA mortgages without meeting HUD’s application and asset requirements.
If this all sounds very technical, HUD has very good reason to be concerned. When lenders push all the costs of the branch onto the branch, the lender is inviting the branch to cut corners in an effort to write enough mortgages to meet its expenses. In other words, quality usually suffers.
Since most residential mortgages are now backed by the federal government, low quality loans mean higher default rates. Inevitably, taxpayers get caught footing the bill unless there is significant equity in the property.
As early as May 2000, HUD published guidance on net branching arrangements. Specifically, HUD said the following arrangements are illegal:
- requiring all contractual relationships with vendors such as leases, telephones, utilities, and advertising to be in the name of the “employee” (branch) and not in the name of the HUD/FHA approved mortgagee.
- requiring the “employee” (branch) to indemnify the HUD/FHA approved mortgagee if it incurs damages from any apparent, express, or implied agency representation by or through the “employee’s” (branch’s) actions.
- requiring the “employee” (branch) to issue a personal check to cover operating expenses if funds are not available from an operating account.
Notwithstanding this long standing policy, many mortgage companies continue to operate illegal net branch schemes. The largest pending false claims act case in the United States, our $2.4 billion case against Allied Home Mortgage, is essentially an illegal net branch claim. Since filing that case last year, several more whistleblowers have come forward with similar claims against other net branch lenders.
If you know of other illegal net branch operations, give us a call. As a whistleblower in a False Claims Act case, you may be entitled to as much as 30% of whatever the government collects. With default rates at record highs, it doesn’t take many bad loans before the potential damages are in the tens or hundreds of millions.
The fraud lawyers at Mahany & Ertl represent whistleblowers in several of these False Claims Act (qui tam) cases nationwide. While not every case is as large as HUD’s claimed damages of $2.4 billion against Allied, the damages in most such cases are nevertheless huge.
For more information, contact attorney Anthony Dietz at or by telephone at (248) 789-5551. You can also contact the author at All inquiries are protected by the attorney – client privilege and kept in strict confidence.
Mahany & Ertl – America’s Fraud Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine and Minneapolis, Minnesota. Services available in many jurisdictions nationwide.